House committee hears factors behind plant closure

Posted: Wednesday, February 16, 2011

By BECKY BOHRER

JUNEAU — The pending closure of the Kenai Peninsula liquefied natural gas plant has focused renewed attention on the energy problems facing Southcentral Alaska — and for lawmakers and the oil and gas industry, there are no easy or quick answers.

ConocoPhillips and Marathon Oil Corp. cited market changes in last week announcing plans to close the plant after more than 40 years in operation.

That period saw the plant become a relic of its time: Once the largest plant of its kind in the world, it came to be dwarfed by more modern facilities. The sole supplier to Japan when it began exports in 1969, it provided less than one-half of a percent of that market’s supply by last year, according to testimony given to a special legislative committee Tuesday. And in recent years, the plant was only able to get two-year extensions of its export license, all factors contributing to the companies’ decision.

But it also was capable of diverting gas to utilities in Southcentral Alaska, an option that won’t exist past this spring. While Marathon has its own storage facilities, allowing it to provide gas to utilities year-round, ConocoPhillips does not; another winter will likely pass before a commercial storage system being pursued by SEMCO Energy, Inc. and MidAmerican Energy Holdings Co. is done.

Both Marathon and ConocoPhillips have said they intend to honor their contracts with local utilities.

With exports ceasing by April or May, ConocoPhillips expects to shut-in some of its wells in the region. And it will likely cost hundreds of millions of dollars to revamp the facility if another long-term export option arises, said Dan Clark, who manages Cook Inlet assets for the company, which is majority owner in and has been operating the plant.

During the House Special Committee on Economic Development, Trade and Tourism, lawmakers asked Clark if taxes were too high or if the state otherwise could have done anything to have helped head-off the closure.

His answer: No.

The challenge ahead is ensuring south-central Alaska — which has relied on Cook Inlet — has the energy it needs. ConocoPhillips intends to preserve the plant for possible future use, including, perhaps, the import of liquefied natural gas.

That’s an option that ENSTAR Natural Gas Co. has considered as it looks ahead, said John Sims, the Anchorage-based utilities corporate communications manager.

ENSTAR serves about 350,000 Alaskans. This was the first winter in its 50-year history that it could not get all the gas it needed through firm contracts, he said. Six times already, he said, the company has purchased gas from ConocoPhillips, with which it has “nonfarm contract,” meaning, that if ENSTAR needs gas and ConocoPhillips has it, it provides it.

“It’s an uncomfortable number,” he said.

ENSTAR is hoping independent producers and the commercial storage system will provide relief.

But the issue of a stable, long-term gas supply for south-central isn’t going away, he said.

A short-term solution — which would address more imminent needs than a proposed major gas pipeline could provide — is necessary, he said. Estimates indicate it would be 2020 at least before a major line, capable of carrying gas from the North Slope to North American markets, would be online. Some lawmakers question whether that time line is realistic — and a large line is viable at all.

An instate line, to meet needs of Alaska residents, is being looked at. But a consultant said recently it would likely need to be heavily subsidized by the state to provide reasonable energy rates.